Archive for December 16th, 2008

What Is Your House Worth? Both Less and More than You Think

Sharon December 16th, 2008

Yesterday’s big news included the fact that Americans lost two trillion dollars in housing wealth last year.  That’s one heck of a big number - except that like most of the big numbers we actually see in the news these days, it radically understates the reality.

You see 2 trillion is just the amount that they claim you could have sold your house for in 2007 vs. 2008.  But that doesn’t really tell the whole story.  Because, of course, this assumes that most of us could access the value of our homes if we wanted to.  But for many people, that’s no longer possible at all.

For example, for many thousands of people who plan to stay in their homes and  would like to access the equity in their homes through home equity lines have seen them revoked.  Millions of people cannot sell their homes at any price, because they are now underwater, and the banks will not permit a short sale, or because they can’t afford to lose their downpayment, but can afford to keep paying the mortgage.  Still more simply could not sell their homes at any price they are willing to accept, because nothing at all is selling, and they cannot find a buyer who can get credit.  The functional value of many homes in the US is very low or negative - that is, the house will continue to cost you mortgage payments and taxes, but you cannot functionally extract any value from them.  Realistically, many, many trillions are now tied up in housing as functionally “lost” value.

For many aging folks who had relied on their housing as an “investment,” and for the many elderly who had most of their wealth tied up in their houses, they will find that not only can they not cash out, they may no longer be able to trade their housing for care in their old age - assisted living depends on high valuation of homes - right now, it seems that few companies wish to take this in trade.  

Is the whole story of home ownership unremittingly bleak, however?  If you are underwater, is that the end of home ownership for you?  My own take is that it isn’t, that there are several ways to shift the economic situation so that homes move from the debit column to the asset column. 

The first is to shift your thinking.  Until not too long ago, people rarely thought of their homes,  primarily as assets.  Your home is, well, your home.  Its value lies not in its potential sale price, or your ability to trade it for something, its value lies in its function.  Now only you can evaluate whether you will be paying too high a price for that home - and this is something we all need to think through.  But if your house is worth the price to you, too tight a focus on its “official” value distracts from the reality - one’s home is one’s home.

But that’s not all there is to it.  Right now most of us with mortgages are pouring money into our houses.  None of us can afford a money pit right now - we might as well at least pay rent, and receive basic services and allow others to take the economic risk and make the repairs if we are simply going to pay out (please do not mistake me, I don’t think renting is a bad idea, in fact - but this post my primary focus is on the present homeowning majority).  So your house has to not just shelter you, but either help you produce money or enable you to reduce other costs.

That means that you need to evaluate your home for what else it can do for you.  Can you grow a garden, and reduce food costs?  Plant fruit trees, nuts and berries?  Raise chickens, rabbits or bees to provide food and fertility?  Raise larger livestock?  Produce some of your home heating or cooking energy in the form of anything from coppiced firewood to twigs and dried grasses for a tiny hot rocket fire to stir fry over?

Could extra rooms in your home enable you to produce additional income or reduce total costs.  Could you rent out a room, make an apartment and rent that, or take in a housemate?  Could you consolidate with your family or with friends? Do you really need all the space you have?

Do you have a workshop that would enable you to do home repairs, fix your own appliances and otherwise cut back on new purchases and hired labor (you may have already done this, but if you don’t, it is time?). Do you have the equipment to mend and repair your own clothing, rather than replace it, or perhaps even make new? 

Could any of these things (or something else) be adapted into an income stream?  That is can you make, build, repair, mend, cook, tend or do something else that is needed in your neighborhood?   There are hundreds of small businesses that can be run from your home part time - everything from small scale programming to selling bulk foods, from daycare to mending and handyman work.  These have the dual effect of offering you an economic fallback position, making your home into an asset (and potentially reducing your tax burden in some cases), and also by engaging with the people immediately around you, improving local economies and communities.

Suburban and rural garages and barns offer the possibility of even more than cottage industry - a business that might eventually employ others in your neighborhood.  Think about what you depend on, and what will be needed in your community - is it possible that your garage might be the new general store?  That your small greenhouse operation might employ your neighbors eventually?  That yours might be the neighborhood bakery or restaurant?  Those of us who live in areas away from commerce might start thinking in terms of establishing local businesses - these may need to stay under the table until enforcement of restrictive regulations is reduced - that is, you might start baking for a couple of neighbors by barter, while also gradually working on finding the equipment to expand eventually.

What about community as an asset.  If you stay put in a place where you have ties (and this presumes we have done the work of making those ties), can they provide a measure of security, of safety, of assistance that we once relied on economic assets for - that is, the neighbors who watch out for you, who help out during illness, who will work with you, who send over a pot of soup when they have extras - those are assets of economic value as well, and must be considered in the calculation.  Staying put can enable us to keep those assets in place.

In many cases, if you are committed to keeping your home - because it is near your family, because it has an ideal yard to grow food in, because you are tied to your community - you will need several of these strategies.  And they may be hard to enact at first - for example, it may be hard to decided who gets to keep their house when the need for family consolidation comes up. Who moves in with who, and how do we protect the interests of those who don’t own?  How do we handle multiple parties working out of the same house?  How do we get used to less privacy and less personal space? 

The other calculation we need to make is the truly long term value of these homes.  Wealth in the US  is disproportionally concentrated in the hands of older people - high housing prices and rapidly inflating educational costs along with stagnant real wages mean that those who bought into markets decades ago got most of the actual wealth.  Older people and younger ones have a shared crisis - the elderly and aging baby boomers who relied on financial investments and housing to ensure security in their old age no longer can rely on either of those things.  Younger people who couldn’t get into the markets, or couldn’t do it without extortionate rates and minimal downpayments have either had no opportunity to own a house or will lose that option rapidly.  So we have older folks with houses, but with declining investment income and a declining number of years of employment, and younger people who can work, but who can’t get into the housing market, who can’t afford a mortgage and who soon, by defaulting on student loans and mortgages, won’t be able to for a long time.

You may not be able to trade a house for assisted living anymore, but you might be able to trade a future in your home for help in your old age - it might be as bluntly mercenary as that, but in most cases, it won’t be, it will be a familial relationship.   But aging baby boomers and the elderly in the US are facing an economic crisis - and they are going to have to start thinking of their homes as a long term asset to be passed down to children and grandchildren - and those children are going to have to start seeing themselves as stewards of a resource, the people who care for the family home, so that their own posterity can inherit it, and who in turn, care for their own parents and relations so that someone will do the same for them.

The shift of housing from a salable asset to something worth holding, a source of income and reduced costs, the place where you live out your life, and the place where your children grow up, come to adulthood, and come home to is going to be the great psychological and economic shift of our times, I suspect.  And any calculation of the value of our homes must begin from this complex question of what our homes are worth - as I say above, I think many of us will find that the answer is both less and more than we ever expected.